All The Clouds Are Swirling For A Damaging Storm In Australia

Australia's expected
growth rate of 3.2% in 2011 may be misleading, because
there's a huge problem waiting to hit the country. Much of this
stellar growth has come from its exports to China.

12% of Australia's GDP growth in the last decade came from trade
with China, a figure that is expected to reach 35% by 2020,
according to Time. Any slowdown in China will likely dim the
outlook for Australia's economy.

The proverbial pet-shop galah can by now recite the facts on
Australia's trade with China and our terms of trade, which are at
a level not seen in over a century. It was already clear by about
2006 that something quite profound was happening in the
continuing rapid growth of China, India and other emerging
countries.

...Let me be clear here: there is a cyclical dimension to the
China story, and it is important that we remember that.

The flow of growth from China is leading to price increases in
China. And Stevens believes it's now time for a tightening cycle
to contain these prices rises in Australia.

The underlying rate of inflation is more likely to rise than fall
over the next couple of years. This central expectation – subject
to all the usual uncertainties inherent in forecasting –
suggests, as we said at the time, that ‘further tightening of
monetary policy is likely to be required at some point for
inflation to remain consistent with the 2–3 per cent medium-term
target

More worrying, Australia's property market is flashing warning
signs as well. Large numbers of Australian's are
struggling with their mortgage payments and the ratio of
household debt to disposable income in Australia is currently
156%. This compares to 133% in the US, before its property bubble
burst. A rate hike from the central bank may make this house
payment problem even worse.

The Sydney Morning Herald reported that 1 in 400 mortgage
holders had missed one or more mortgage payments at the end of
March. In Logan City the 1 in 48 were 30 days behind on their
payments as living costs in Australia skyrocket.

If Australia was to hike rates, while China slowed down more, it
could
cause problems for the country's housing market.